Particular circumstances involving a security that would compel investors to trade the security based on the special situation, rather than the underlying fundamentals of the security or some other investment rationale. An investment made due to a special situation is typically an attempt to profit from a change in valuation as a result of the special situation, and is generally not a long-term investment. Taobiz explains Special Situation A good example of special situation that would prompt investors' attention would be a large public company spinning off one of its smaller business units into its own public company. If the market deems the soon-to-be-spun-off company to have a higher valuation in its present form than it will after the spinoff, an investor might buy shares in the larger company before the spinoff in an attempt to realize a quick price increase. There are many other circumstances that could be referred to as special situation investment opportunities such as tender offers, mergers and acquisitions, and bankruptcy proceedings.
A publicly-traded buyout company that raises money in order to pursue the acquisition of an existing company. SPACs raise blind pool money (most of which goes into a trust) from the public for an unspecified merger, sometimes in a targeted industry. Each SPAC is typically sold at $6 per unit for one share of common stock (to be publicly-traded in the future) and two warrants that can purchase additional shares. If an acquisition is not made in two years, the money is returned to the original investors. Also known as a "targeted acquisition company (TAC)". Taobiz explains Special Purpose Acquisition Company - SPAC You can think of a SPAC as a kind of reverse IPO. The SPAC raises money to go public first, then looks for a private company to buy - usually in the high-tech sector. Here's how a deal with a SPAC might work: a group of investors wants to buy a company that makes space widgets. They don't know what company, just that it has to be in the new space widget market. The investors go to an investment bank that has been raising funds from the public for the SPAC's management team. The investment bank takes a fee (often around 10%), and the management goes out looking for companies over the next two years. If things go well, management buys a company with cash and/or shares, takes 20% of the profits that are (hopefully) generated, and the shareholders get ownership in a new company. Critics say that SPACs are nothing more than a slick way for investment banks and management to collect huge fees with most of the risk falling on investors. Proponents say that SPACs serve an important role in bringing new technology to the market.
A non-recurring distribution of company assets, usually in the form of cash, to shareholders. A special dividend is larger compared to normal dividends paid out by the company. Also referred to as an "extra dividend". Taobiz explains Special Dividend Generally, special dividends are declared after exceptionally strong company earnings results as a way to distribute the profits directly to shareholders. Special dividends can also occur when a company wishes to make changes to its financial structure or to spin off a subsidiary company to its shareholders. For example, GenTek Inc. issued a special cash dividend of $31 per share on Mar 16, 2005, in order to restructure toward a more debt-based financing mix.
One of the largest stock scams of all time. The U.K.-based South Sea Company's shares saw a huge appreciation based on rumor, speculation and false claims before plummeting and eventually becoming worthless. Thousands of people lost their life savings. Taobiz explains South Sea Bubble The scam occurred in 1720, when South Sea's stock soared in the wake of speculation and greed surrounding the monopoly the South Sea Company was perceived to have in the shipping and trade industries, particularly in Mexico and parts of South America. With nothing to prevent it from doing otherwise, South Sea Company's management continued to issue shares in response to seemingly insatiable demand. As a result, the stock's price soared, defying all fundamental sense. Eventually, the truth was exposed: the company was making virtually no profit, and the share price plummeted when investors fled. In the post-Enron investing world, some have dubbed this scam the "Enron of England".
A type of economic moat (or competitive advantage) that is based on intangible qualities such as exceptional management or a unique corporate culture that breeds success. Taobiz explains Soft Economic Moat Soft moats are more difficult to identify than better-known economic moats such as brand name, pricing power, high switching costs and market share. Nevertheless, they can be a great way for companies to ward off competitive pressures. Many would argue that Jack Welch's exceptional leadership at General Electric as the company's CEO from 1981-2001 provided GE with a soft economic moat.
A slang term for traders who make rapid buy and sell orders, using the SOES system, in order to make a profit from small price changes. Taobiz explains SOES Bandits Since the SOES executes orders of 1000 shares or less immediately, an SOES bandit has a greater chance of profiting since the bid-ask spread is tight and prices are extremely accurate.
A description of stock where the underlying company has a small market capitalization, and whose stock price is currently trading at or lower than its book value. Finding a stock that fits both of these criteria is difficult, but it could be a worthwhile venture, because small-value stocks generally yield high returns. The name can be somewhat misleading as these stocks are not of lesser value; "small" in this case simply refers to the size of the company. Taobiz explains Small-Value Stock According to Fama and French's three factor model, small-value stocks possess the two best qualities: size and value. According to the model, small cap stocks tend to outperform large cap stocks, because small stocks in general have a greater opportunity to grow compared to their larger counterparts. In addition, value stocks generally have more upside potential compared to their growth stock counterparts, because growth stocks tend to already possess high valuations fueled by positive expectations for future growth. Therefore, it is difficult for such a stock to grow at this point in time compared to an undervalued counterpart.
A general term describing a stock with high risk relative to any potential positive returns. Speculative stocks are often purchased by those who believe the stock will appreciate in value without performing a detailed analysis. Taobiz explains Speculative Stock Speculative stocks often have a high probability of declining in value and a low probability of experiencing above-average gains. Investors in these types of stock may be overly optimistic about the probability of earning above average gains, or the lure of the above average gains may be enticing enough for them to make a purchase. Penny stocks are an example of a speculative stock.
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